What are bond yields telling us about the global economic growth outlook?

Since the discovery of the Covid-19 vaccine, investors shunned high-quality global bonds as they jumped onto the reflation trade bandwagon. Risk assets dominated portfolios as expansive fiscal and loose monetary policies created fertile ground for increased risk-taking.

 

Things took a turn, over the past week or so with the US 10-year treasuries yield falling to around 1.33% from the March high of 1.74%, confounding market expectations of higher inflation and rates.

 

The correlation between rates and the economic growth (shown on our chart of the week below) suggests that current expectations of sustained economic expansion, rising inflation and by extension company earnings are overly optimistic. It might be time for investors to pay a little more attention to global bonds.